US Dollar gains for second day on safe-haven currencies flight

The US Dollar showed broad strength throughout Tuesday’s trading session for the second straight day. Investors once again flocked to safe-haven currencies on concerns surrounding a Chinese economic slowdown, with the Japanese Yen and Dollar experiencing strong gains against the majority of global currencies.

The Euro was driven lower still by more underwhelming inflation figures in the Eurozone, which puts further pressure on the European Central Bank to expand its already sizable quantitative easing programme in the coming months.

Last month ECB President Mario Draghi still refrained from expanding monetary stimulus and instead opted for only a very modest cut in the central bank deposit rate. We would expect additional quantitative easing to put further pressure on the single currency. Yesterday the Euro ended the day 0.7% lower versus the Dollar.

Impressive construction data in the UK did little to change expectations of a possible interest rate hike this year. The Bank of England is still concerned about the state of the economy and the consensus has barely shifted. The GBP ended 0.4% lower versus the USD after Tuesday’s trading session. Our long-term expectation is that the Pound will continue on a middle path between the Euro and the US Dollar.

Focus today will predominantly be on the Federal Reserve in the US, which will release the minutes from its significant December Federal Open Market Committee meeting, which yielded the first interest rate hike in the US in nine years.

Major currencies in detail:

GBP

Sterling hit another nine-month low against the US Dollar on Tuesday, down by 0.4%.

Yesterday’s construction PMI failed to bolster expectations that the Bank of England would be hiking interest rates any time soon. The PMI, released by Markit, increased to 57.8 from 55.3, well above the consensus forecast of 55. While economic data and the medium-term economic outlook remain good, investors are continuing to focus more on the Bank of England and fears over a ‘Brexit’ from Europe after David Cameron recently hinted at a referendum as early as this year.

More data from Markit today could shed further light on the likely reading for fourth quarter economic growth. The Services PMI this morning is expected to show a moderate slowdown in the sector.

EUR

Headline inflation in the Eurozone registered just 0.2% on an annualised basis in December, no change on a month period, but lower than expectations. Moreover, core inflation, which strips out volatile prices such as energy, increased by just 0.8%, its weakest level of growth since June last year.

The rate of unemployment in Germany remained unchanged as expected at 6.3% following a relatively modest fall in the overall figure. The consumer price index announcement was, however, the main focus of the day, and further suggests that the ECB’s ten-month-old monetary policy experiment is failing to generate the desired effect. Inflation of barely above zero means that the Eurozone has failed to register price growth of over 0.2% for the past seven months.

Wednesday looks set to be a busy day in terms of economic indicator data in the Eurozone. Markit Services PMIs for all of the Euro-area’s major countries will be followed by the producer price index.

USD

The US Dollar gained on Tuesday, with the currencies continuing to benefit from the safe-haven flow following further signs of an economic slowdown in China. The US Dollar index rose 0.5% over the course of the day.

Yesterday’s rally was not helped by economic data in the US, which was very thin on the ground and no more than second-tier. The ISM’s New York Index, which represents manufacturing growth in the New York area, rose marginally to 62 from 60.7, although not enough to warrant any sort of reaction in the Dollar.

Investors will instead be looking closely over tonight’s minutes from the Fed. Any further hints with regard to both the timing and pace of future rate increases could cause movement in the Dollar this evening when released at 7:00pm London time.

Rest of the world

Among the other major currencies, the Australian Dollar, New Zealand Dollar and Swedish Krona all fell substantially once again, for the second straight day.